Security accessions and rectification: a common mistake?

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Back in July, Talking Business published a blog on rectification which discussed when the courts may be prepared to step in and correct a contractual mistake. In Persimmon Homes Ltd v Hillier[1], rectification was granted on the grounds of common mistake.

Rectification was recently considered again by the courts in FSHC Group Holdings Ltd v Barclays Bank Plc[2]. This case again demonstrates the courts’ willingness to rectify transaction documents if they do not represent the true intention of the parties involved.

The case concerned two accession deeds which were entered into by Barclays Bank (Barclays) and the parent company in the Four Seasons Healthcare Group (FSHC).

The omitted security

A private equity deal took place in 2012 which involved a US hedge fund acquiring an interest in FSHC. The deal involved numerous finance documents which were signed by the parties and the transaction completed. The deal was uncontroversial at the time.

The transaction required FSHC to grant security over a shareholder loan. However, in 2016 it emerged that FSHC had not provided security over one of the loans or, at least, it could not be located.

FSHC provided the missing security by entering into two deeds under which it acceded to existing security, to which Barclays was a party as security trustee. However by entering into the accession deeds FSHC assumed obligations that were far more onerous than necessary in order to comply with the terms of the original documents.

A bad bargain?

Rectification was sought by FSHC on the basis that it was the common intention of the parties to only provide a limited form of security and nothing more. Barclays (acting on the instructions of a hedge fund that held the majority of the debt) opposed this.

FSHC claimed that neither party intended that the additional obligations be imposed. The intention was merely to provide the missing security. Barclays, however, argued that FSHC knew what it was entering into by the simple accession deeds and that it deliberately chose to enter into the more onerous security in an effort to expedite the granting of security and avoid a default.

Barclays claimed that FSHC was merely trying to amend what it now considered to be a bad bargain. Previous case law[3] has established that rectification cannot be used to remedy a bad bargain.

The judge noted that ‘rectification cases are fact sensitive, and resolution of this dispute requires an intense focus on the facts.’ The case in hand had ‘very significant commercial consequences’.

Having heard witnesses for both parties, the judge was satisfied that there was no intention by either party for FSHC to undertake the additional, more onerous obligations – the only intention was to grant the limited form of security originally required. There were no prior discussions between the parties around the specific point in issue which was said to be convincing proof of a common intention not to incur the additional obligations. Also, it would have been ‘commercially absurd’ for FSHC to provide the more onerous additional security.

It would have been inequitable not to grant rectification and so the claim was successful.

Common intention

In granting rectification, the judge considered the principles which applied when determining a common mistake. The case report goes through these in turn in some detail and provides a useful summary.

Broadly, where the terms of a document fail to reflect the true agreement between the parties, the document may be rectified so that it reflects their mutual agreement or understanding. The purpose of rectification is, essentially, ‘to put the record straight‘, but the judge did point out that the courts do not have ‘roving commission to do whatever it regards as fair in relation to a claim for rectification‘.

The judge concluded that in circumstances where an independent observer would determine that the parties had a common intention which was not reflected in the agreement it may be inequitable not to rectify the agreement.

The case is unusual as it involves rectification of a contractual agreement, the basis of which arose from the terms of a related (pre-existing) document. Both this case and the Persimmon Homes case highlight how it is possible to succeed in a claim for rectification, but it will very much depend on the specific circumstances of the case.